US Supreme Court Further Limits Jurisdictional Reach of the US Courts Over Foreign Torts

The U.S. Supreme Court began 2014 by issuing a decision limiting the ability of plaintiffs to assert tort claims against foreign corporations in the U.S. courts based on events occurring outside the United States. In Daimler AG v. Bauman, the Court held that federal due process prevents a court from exercising general personal jurisdiction over a foreign corporation in a dispute involving foreign activities based solely on unrelated contacts of its wholly owned U.S. subsidiary.

The Bauman decision follows on the heels of three of Supreme Court decisions curtailing the scope of the Alien Tort Statute (ATS), the Torture Victim Protection Act (TVPA) and the Securities and Exchange Act of 1934.1 The ramifications of Bauman, however, are much more far-reaching than these prior decisions, which involved the extraterritorial application of particular federal statutes. Because the Court in Bauman addressed the broader issue of the federal constitutional limitations on personal jurisdiction, the decision affects the reach of both the federal and state courts over foreign defendants in cases involving both common law and statutory claims.

The Bauman Case

In Bauman, a group of 22 Argentine residents brought tort and statutory claims in the U.S. District Court for the Northern District of California, alleging that they and/or their relatives were victims of mistreatment and torture by Argentine police and military forces during the country’s “Dirty War” of the 1970s and 1980s in which opponents of the government allegedly were subject to covert persecution by state security agencies. The plaintiffs alleged that Daimler AG’s Argentinian subsidiary, Mercedes-Benz Argentina (MBA), collaborated with state security forces to injure the plaintiffs and/or their relatives during this period.

However, MBA did not conduct business in California, and none of the alleged tortious acts occurred in that state. Moreover, as the district court held, Daimler AG itself did not have a general presence in California sufficient to support the exercise of general jurisdiction over it.2 The plaintiffs, however, asserted an alternative basis for jurisdiction, namely, that Daimler AG was “present” in California by virtue of having a Delaware-incorporated subsidiary, Mercedes-Benz USA (MBUSA). Headquartered in New Jersey, MBUSA undertook the distribution and sale (including in California) of Mercedes-Benz vehicles allegedly manufactured by Daimler AG. MBUSA, the plaintiffs claimed, was the “agent” in California of Daimler AG and, therefore, Daimler AG itself should be viewed as being present in California.

The District Court Decisions

In 2005, the federal district court tentatively ruled that the plaintiffs had failed to substantiate their claim, but postponed its final order of dismissal pending jurisdictional discovery by the plaintiffs into the relationship between MBUSA and Daimler AG.3 Two years later, following such discovery, the district court dismissed the claim, finding that evidence of “agency” was lacking. Specifically, it held that a subsidiary corporation should be considered an agent of its parent only if the subsidiary performed “services sufficiently important to the parent corporation that if it did not have a representative to perform them, the parent corporation would undertake to perform substantially similar services.”4 It concluded that MBUSA’s functions as distributor of vehicles in the United States was not a core activity of the kind that would lead to MBUSA being viewed as the agent of its parent.5 Thus, it concluded that Daimler AG should not be viewed as being generally present in California.

The Appellate Court Rulings

On appeal, the U.S. Court of Appeals for the Ninth Circuit initially agreed with the district court. In 2009, a three-judge panel held, by majority, that California had no jurisdiction over Daimler AG.6 A year later, however, the same panel granted a petition for rehearing and vacated its prior opinion, holding that it had been persuaded by arguments that it should focus more closely on the legal test for determining whether a parent corporation could be viewed as present in California through a subsidiary. In 2011, the Ninth Circuit issued a new opinion in which it reversed the district court’s decision, held that MBUSA’s activities did indeed establish an agency relationship between Daimler AG and MBUSA, and found jurisdiction over Daimler AG.

In this regard, the Ninth Circuit considered whether the subsidiary’s activities were “sufficiently important to the foreign corporation that if it did not have a representative to perform them, the corporation’s own officials would undertake to perform substantially similar services.”7 It found that agency was established under this test because:

the distributorship functions indeed were “sufficiently important to [Daimler AG] that they would almost certainly be performed by other means if MBUSA did not exist, whether by [Daimler AG] performing those services itself or by [Daimler AG] entering into an agreement with a new subsidiary or a non-subsidiary national distributor for the performance of those services.”8

The U.S. Supreme Court granted certiorari to “decide whether, consistent with the Due Process Clause of the Fourteenth Amendment, Daimler is amenable to suit in California courts for claims involving only foreign plaintiffs and conduct occurring entirely abroad.”9

The Supreme Court’s Decision

In its opinion issued on January 14, 2014, the Supreme Court unanimously reversed the Ninth Circuit and held that the exercise of general jurisdiction over Daimler AG by the California courts was beyond the limits imposed by federal due process.10

The Supreme Court focused on the difference between “specific or conduct linked jurisdiction” (i.e., where the case has a specific connection with the forum in question) and “general” jurisdiction, where such a link does not necessarily exist. The Bauman plaintiffs sought to establish general jurisdiction: thus, even though the case involved “events occurring entirely outside the United States,” the plaintiffs contended that Daimler AG had a sufficient connection with California such that it could be subject to “on any and all claims” in that forum “wherever in the world the claims may arise.”11 The Supreme Court disagreed, holding that “[e]xercises of jurisdiction so exorbitant . . . are barred by due process constraints on the assertion of adjudicatory authority.”12

The Court began with the established principle that a state court may exercise general jurisdiction over a foreign corporation “only when the corporation’s affiliations with the State in which suit is brought are so constant and pervasive ‘as to render [it] essentially at home in the forum State.’”13 It recognized, however, that it had not previously considered “whether a foreign corporation may be subjected to a court’s general jurisdiction based on the contacts of its in-state subsidiary.”14

Although the proffered basis for jurisdiction was that MBUSA was the “agent” for Daimler AG, the Court held that it was not necessary to resolve the question of whether “agency” could be a valid ground for asserting “general jurisdiction” against a foreign company because, it held, “in no event” could the Ninth Circuit’s analysis be sustained.15 It held, first, that the Ninth Circuit’s analysis of the subsidiary’s contacts with the forum — which looked to whether a subsidiary’s actions in the forum were “important” to the parent — was unacceptable. This test, the Court observed, “stacks the deck, for it will always yield a pro-jurisdiction answer” and would almost always create jurisdiction based on the mere existence of a subsidiary.16

The Court also disagreed with the plaintiff’s position that a foreign corporation can be subject to general jurisdiction in any state where it ““engages in a substantial, continuous, and systematic course of business.”17 This formulation, it explained, might be appropriate when used as part of a test to establish specific jurisdiction, but it was “unacceptably grasping” if used as a test for general jurisdiction.18 Rather, in ascertaining whether general jurisdiction existed, a U.S. court should inquire whether the corporation had to be viewed as “‘essentially at home’” in the forum state.19

Applying this test to the facts, the Court noted that neither Daimler nor MBUSA was incorporated in California or headquartered there and that “[i]f Daimler’s California activities sufficed to allow adjudication of this Argentina-rooted case in California, the same global reach would presumably be available in every other State in which MBUSA’s sales are sizable.” It then held:

It was therefore error for the Ninth Circuit to conclude that Daimler, even with MBUSA’s contacts attributed to it, was at home in California, and hence subject to suit there on claims by foreign plaintiffs having nothing to do with anything that occurred or had its principal impact in California.20

In the final section of its opinion, the Court pointedly noted that “the transnational context of this dispute bears attention.”21 It admonished the Ninth Circuit for paying “ little heed to the risks to international comity its expansive view of general jurisdiction posed.”22 “Other nations,” it observed, did not “share the uninhibited approach to personal jurisdiction advanced” by the Ninth Circuit.23 In the European Union, for example, the Brussels Regulation imposes a rule that “a corporation may generally be sued in the nation in which it is ‘domiciled,’ a term defined to refer only to the location of the corporation’s ‘statutory seat,’ ‘central administration,’ or ‘principal place of business.”24 “Considerations of international rapport,” it held, “thus reinforce our determination that subjecting Daimler to the general jurisdiction of courts of California would not accord with the ‘fair play and substantial justice’ due process demands” imposed by the United States Constitution.25

* * *

Bauman has significant implications for corporate defendants that lack a U.S. presence, but which have affiliates, distributors or other representatives in the United States. The full impact of Bauman, however, will be determined, in the first instance, by trial and intermediate appellate courts addressing the multitude of situations where foreign companies find themselves defending claims in the U.S. courts, particularly where the dispute relates to events taking place in foreign jurisdictions.

10 Id., slip op. at 2. The Court’s opinion, in which eight Justices joined, was written by Justice Ginsburg. Justice Sotomayor concurred in the judgment of the Court, but not “with the path the Court [took] to arrive at that result.” Concurring Opinion, slip op. at 1. In her view, the court’s holdings were based upon issues that had not been squarely presented in the parties’ briefing and not supported by a full evidentiary record. Id. at 5-8. Instead, she would have reversed the Ninth Circuit on the grounds that it would be unreasonable for a court in California to exercise jurisdiction over Daimler in a case involving “foreign plaintiffs suing a foreign defendant based on foreign conduct [where] a more appropriate forum is available.” Id. at 2.

15 Id. at 16-17. Although it noted the wide variety of potential forms of “agency,” and that certain forms of agency might only support “specific” jurisdiction, the Court declined to elaborate further. See id.

16 Id. at 17. Although the Ninth Circuit also required a showing of “control” by the parent over the subsidiary’s actions, the Court remarked that this “hardly curtailed” jurisdiction in the circumstances. Id. at 17 n.16.

17 Id. at 18.

18 Id. at 19.

19 Id. at 19-20. In a footnote, the Court stated that it “d[id] not foreclose the possibility that in an exceptional case, . . . a corporation’s operations in a forum other than its formal place of incorporation or principal place of business may be so substantial and of such a nature as to render the corporation at home in that State.” Id. n. 19. It held, however, that such circumstances were not present in the case before it. Id.

20 Id. at 21.

21 Id. at 22.

22 Id. at 22-23.

23 Id. at 23.

24 Id. (citing European Parliament and Council Reg. 1215/2012, Arts. 4(1), and 63(1), 2012 O. J. (L. 351) 7, 18). The Court also noted the U.S. solicitor-general’s observation that past treaty negotiations had been “impeded” by some foreign governments’ objections to “‘some domestic courts’ expansive views of general jurisdiction.’” Id. (citing amicus brief submitted by U.S. solicitor general).

25 Id.

This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.

________________________________

*This article appeared in the firm's sixth annual edition of Insights on January 16, 2014.